Delek Logistics Partners, LP — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; comparative periods ended September 30, 2015. Amounts are in U.S. dollars. The Partnership owns and operates crude-oil and refined-products logistics, transportation, storage, wholesale marketing and terminalling assets. A substantial portion of its business supports or depends on Delek’s refineries and commercial agreements.
Financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $107.5 million | $165.1 million | $323.4 million | $480.7 million |
| Operating income | $17.0 million | $21.8 million | $58.5 million | $59.4 million |
| Net income | $13.2 million | $18.6 million | $47.5 million | $50.9 million |
| EBITDA (non-GAAP) | $22.0 million | $26.1 million | $72.9 million | $72.7 million |
| Distributable cash flow (non-GAAP) | $19.1 million | $22.6 million | $63.2 million | $60.4 million |
| Operating cash flow | $29.2 million | $20.2 million | $86.8 million | $66.8 million |
Q3 operating margin was approximately 15.8% versus 13.2% in Q3 2015; nine-month operating margin was approximately 18.1% versus 12.4%. These ratios are calculated from reported operating income and net sales. The filing does not present them as reported measures.
- Quarterly distribution: $0.655 per unit for Q3, up from $0.570 a year earlier; the declared distribution totaled $19.3 million and was payable November 14, 2016. Annualized per-unit rate: $2.62.
- Balance sheet at September 30: total assets $393.2 million; cash was nominal; revolving-credit borrowings were $375.0 million; total deficit was $14.0 million.
- Liquidity and debt: $318.5 million of unused credit commitments and $6.5 million of outstanding letters of credit under a $700 million revolving facility, maturing December 30, 2019. Weighted-average borrowing rate was approximately 2.9%. Management reported covenant compliance and expected available liquidity sources to meet anticipated needs, including distributions, for at least 12 months.
- Investing: operating cash flow was offset by $60.2 million of investing outflows, including $54.7 million contributed to equity-method joint ventures. Nine-month capital expenditures were $5.0 million; cash purchases of property and equipment were $5.6 million.
Changes versus comparable periods
- Q3 sales declined 34.9% and net income declined 29.3%; nine-month sales fell 32.7% and net income fell 6.7%. Lower gasoline and diesel prices and volumes in west Texas wholesale marketing were the main causes of lower sales. Q3 gasoline and diesel sales volumes fell by 21.0 million and 6.2 million gallons, respectively; nine-month volumes fell by 31.3 million and 22.8 million gallons.
- Q3 contribution margin fell 15.1% to $24.7 million, chiefly due to lower Paline Pipeline contractual volumes and weaker west Texas margins. Nine-month contribution margin edged down 0.9% to $81.6 million: lower pipeline, trucking and west Texas results were largely offset by higher terminal throughput and fees under the marketing agreement.
- Despite higher operating cash flow and nine-month distributable cash flow, net income declined. Interest expense rose 19.9% in Q3 and 29.9% for the nine-month period, reflecting borrowing utilization and interest costs associated with joint-venture investments and, for the year-to-date comparison, the 2015 acquisitions.
- Lower maintenance costs and cost-saving initiatives reduced operating expenses. Depreciation and amortization increased with assets placed in service.
- All 11,999,258 subordinated units converted to common units in February 2016. The conversion did not change total limited-partner units, but increased common units and affected per-unit comparisons.
Outlook, risks and unusual items
- Management reduced its 2016 capital-spending forecast to approximately $10.6 million from $14.3 million, mainly because certain tank maintenance work was rescheduled to 2017. The filing provides no specific earnings or revenue guidance.
- The RIO Pipeline began operations in September 2016. The Caddo Pipeline System was expected to be completed by January 2017. The Partnership had contributed $95.8 million toward approximately $101.0 million of projected combined joint-venture investment; the projection was subject to change.
- The Paline Pipeline hydro test was completed in August 2016 and cost approximately $1.0 million, split between operating expense and capital expenditure. July tariff and certain agreement fee adjustments included a 2.0% decrease for FERC-indexed charges.
- Environmental matters include an approximately 350-barrel January 2016 Paline Pipeline release, for which $0.1 million was accrued, and a potential EPA/Arkansas enforcement action related to the 2013 Magnolia release, for which $1.0 million was accrued. The Partnership said release remediation costs are generally reimbursable by Delek under the omnibus agreement, but penalties or other relief may arise in the Magnolia matter.
- Key exposures include reliance on Delek and its ability to perform under commercial agreements; lower crude-oil prices and resulting throughput or west Texas demand; wholesale marketing margins and commodity-price volatility; pipeline, tank and environmental incidents; floating-rate debt; and execution and returns on joint ventures. A 1% interest-rate change on period-end floating-rate debt would change annual interest expense by approximately $3.8 million.
- The Partnership reported no material pending litigation expected to adversely affect its financial position or results. It stated disclosure controls were effective and there had been no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether west Texas sales volumes and margins stabilize, and whether lower Paline contractual volumes persist.
- Distribution coverage and cash generation: Q3 distributable cash flow of $19.1 million was slightly below the $19.3 million distribution declared for the quarter; confirm the calculation basis and sustainability.
- Debt utilization, covenant headroom and refinancing or interest-rate exposure, particularly given nominal cash and substantial joint-venture investment.
- Progress, completion costs and expected returns from RIO and Caddo, including Caddo’s stated completion expectation.
- Resolution and ultimate costs of the Magnolia enforcement matter, and the extent and timing of Delek reimbursements for releases and eligible capital expenditures.
- Delek dependence and related-party arrangements, including customer concentration, contract terms and Delek’s capacity to meet its obligations.